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The ESG Review: Mid-sized private companies face an ESG tipping point

Momentum for regulation that would force new transparency demands upon large publicly-listed companies is gathering pace and this week has seen a rise in media analysis of private firms moving to prioritise improved ESG reporting.

The premise of private equity firms applying a centralised approach to ESG programmes across their portfolio companies is not new in itself. But articles in the business, legal and investment media have pointed to an acceleration of more comprehensive and more transparent approaches to charting ESG progress and determining the value created.

Private companies obviously don’t have many of the information disclosure requirements that public companies must adhere to, but investors mandating that private firms, even smaller and mid-sized ones, largely ‘behave’ like listed ones in their disclosures seems to have become more common. And in doing so, they are being tasked with sharing genuine, credible and scientifically-quantifiable updates about sustainability achievements in particular.

As a Financial Times piece that outlined Brookfield Asset Management’s approach put it, “This opacity makes it difficult to judge who is integrating ESG principles seriously, an issue that has rocked fund managers in recent months as authorities on both sides of the Atlantic crack down on inflated sustainability claims.”

And as the drive for clearer, standards-based ESG reporting frameworks continues in parallel to the legislative agenda, the sense is that private mid-sized companies are beginning to fall in line with those likely future demands through best practice osmosis, rather than because of looming stipulations.

“For managers of these funds, the issue is determining what key performance indicators to follow to meet an ever evolving set of standards. But getting this step right is essential,” as this Barron’s piece put it.

And according to a Banking Exchange report on a recent BDO survey, 99 per cent of private equity fund managers had already identified an ESG strategy, with objectives including increasing value at exit, and talent retention.

“If the private company is within the value chain, upwards or downwards, of a company that has to provide the Scope 3 metric in their report, they will be asked to help provide that information,” said one lawyer in an recent article in CFO Dive.

Perhaps the final word on this is best left to the FT again though, with this quote from a senior asset manager: “Investors really expect us to be in there leading this change. You’re running these businesses, you have no excuse. I think it’s good actually that we don’t have an alibi.”

The ESG News Review is written by Steve Earl, a Partner at BOLDT

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